Foreign investment in California real estate has been growing for decades. Companies incorporated in other countries, whether a holding company registered in the Cayman Islands, a corporation formed in Canada, or an entity based in Hong Kong, frequently own residential and commercial property in Los Angeles and throughout the state. When it comes time to sell, many of those ownership situations hit a wall at the escrow table because the parties were not prepared for the tax withholding requirements, documentation demands, and California state obligations that apply specifically to foreign-owned entities. This post explains what sellers, agents, and buyers need to know when a foreign corporation is on the other side of a California real estate transaction.
What Makes a Corporation Foreign for California Real Estate Purposes
The Definition That Triggers FIRPTA and California Withholding
A corporation is considered foreign for federal tax purposes if it was formed under the laws of another country and has not made a special election to be treated as a domestic corporation under Internal Revenue Code Section 897(i). This applies regardless of where the company’s officers are located, whether the company has US bank accounts, or whether the property has been managed by US-based agents for years. The test is where the entity was incorporated, not where its operations are based.
For California state purposes, an entity that was not formed in California and does not have a California Secretary of State registration is considered a foreign entity. Owning real property in California generally constitutes doing business in the state under California law, particularly when the property value exceeds state thresholds, which means most foreign corporations that have owned California real estate for any significant period have registration and tax filing obligations with the state regardless of whether they have formally registered.
FIRPTA Withholding and How It Works for Foreign Corporations
The Federal Law That Applies Every Time a Foreign Entity Sells US Real Estate
The Foreign Investment in Real Property Tax Act (FIRPTA), enacted in 1980 and updated multiple times since, requires that when a foreign person or entity sells a US real property interest, the buyer must withhold a percentage of the amount realized and remit it to the IRS. This withholding is not the tax itself. It is a prepayment deposit that the IRS holds while the foreign seller files a US tax return and the actual tax liability is calculated. Any excess over the actual tax owed is refunded after the return is filed.
For foreign corporations selling California real estate, the standard FIRPTA withholding rate is 15 percent of the gross sales price when the price exceeds $1,000,000. For sales between $300,001 and $1,000,000 where the buyer intends to use the property as a residence, the rate drops to 10 percent. Below $300,000 with a residential-use buyer, no FIRPTA withholding is required. However, because many California properties selling to cash buyers or investors do not qualify for the residential-use exception, the 15 percent rate applies to most foreign corporation transactions in the Los Angeles market.
Who Is Responsible for the Withholding and When It Must Be Remitted
This is one of the most important and most misunderstood aspects of FIRPTA. The buyer, not the seller, is the withholding agent under federal law. The buyer is legally responsible for withholding the required amount from the purchase proceeds and remitting it to the IRS, typically through the escrow company, within 20 days of the closing date. If the buyer fails to withhold and the foreign seller fails to pay the underlying tax, both the buyer and the seller can be held liable for the unpaid tax plus penalties and interest.
In practice, escrow companies handle the FIRPTA withholding and remittance on behalf of the buyer in California. The escrow officer will calculate the withholding amount, hold it through closing, and submit it to the IRS on the required forms, primarily Form 8288 and Form 8288-A, within the 20-day window. Sellers should be aware that they will not receive 100 percent of their net proceeds at closing. The withheld amount is held until the foreign corporation files a US tax return and the IRS processes any refund of the excess.
Applying for a Withholding Certificate to Reduce the Amount Withheld
If the actual tax liability on the sale gain is less than what FIRPTA withholding would require, the foreign corporation can apply to the IRS for a Withholding Certificate using Form 8288-B before or at the time of closing. The certificate, if approved, authorizes a reduced withholding amount that more closely matches the actual estimated tax. This is important because 15 percent of the gross sales price can be a very large number, often far exceeding the actual capital gains tax owed, particularly if the property has significant debt secured against it.
Withholding certificate applications typically take around 90 days for the IRS to process. In practice this means the application needs to be filed well before the expected closing date. During the application period, the withheld funds may be held in escrow rather than being remitted to the IRS immediately, but this requires coordination between the escrow company and all parties. Foreign corporations considering a California property sale should engage a US tax attorney or CPA experienced in international real estate transactions as early as possible in the process.
California State Withholding on Top of FIRPTA
Form 593 and the State’s Separate Withholding Requirement
California imposes its own real estate withholding requirement entirely separate from FIRPTA. Under California Revenue and Taxation Code Section 18662, the buyer or escrow company is required to withhold 3.33 percent of the gross sales price from any seller that is not a California resident or California-domiciled entity and remit it to the Franchise Tax Board (FTB) using Form 593. This applies to foreign corporations selling California real estate just as it applies to any other out-of-state seller.
The Form 593 withholding must be remitted to the FTB by the 20th day of the month following the close of escrow. Like FIRPTA withholding, it is a prepayment of California income or franchise tax on the gain from the sale. The foreign corporation will need to file a California tax return for the year of the sale and will receive a credit for the withheld amount toward any California tax owed. Excess withholding is refunded after the return is processed.
Here is a summary of both withholding layers that apply when a foreign corporation sells California real estate:
| Withholding Type | Rate | Administered By | Forms Required | Remittance Deadline |
|---|---|---|---|---|
| FIRPTA (federal) | 15% of gross sales price (standard) | Buyer, typically through escrow | Form 8288, Form 8288-A | Within 20 days of closing |
| California state | 3.33% of gross sales price | Escrow company on buyer’s behalf | Form 593 | By 20th of following month |
What the Foreign Corporation Must Have Ready Before Closing
Documentation the Title Company and Escrow Will Require
A foreign corporation selling California real estate needs to prepare a specific set of documents well in advance of closing. Missing any of them will stall the transaction. Here is what escrow and title typically require:
- Certified copy of the corporation’s articles of incorporation or certificate of formation from the country where it was incorporated
- Corporate resolution or board authorization specifically authorizing the sale of the California property and identifying the officer or officers with authority to sign closing documents on behalf of the entity
- The corporation’s US Employer Identification Number (EIN), which is required on both the FIRPTA forms and the California Form 593. If the corporation does not have an EIN, it must apply for one with the IRS before closing, which can take several weeks
- A notarized signature by the authorized corporate officer on the grant deed. If that officer is located outside the US, the notarization may need to be completed before a US consulate or via apostille depending on the country
- The FIRPTA Form 8288-B if applying for a withholding certificate, filed before or at closing with the IRS
- Confirmation from the title company that the vesting matches the seller’s name exactly as it appears on the deed of record. Any discrepancy between the recorded owner and the entity presenting documents at closing will delay the transaction
California Registration and Tax Compliance of the Foreign Corporation
A foreign corporation that owns California real estate is typically considered to be doing business in California under state law, which triggers an obligation to register with the California Secretary of State and file California franchise tax returns. Many foreign corporations that purchased California property as passive investments were never properly registered and never filed California returns. The title company may flag this during the title process, and it can require resolution before the sale can close cleanly.
A corporation that has been doing business in California without registering may also face penalties from the California Franchise Tax Board. Those penalties can become liens against the corporation’s California assets, which would show up on the preliminary title report as clouds on title. Our post on why we request a title report immediately and why it protects you explains how these issues get surfaced early in the process and why acting quickly when they appear is so important.
Our post on the paperwork involved in a cash sale covers the closing documents that apply in any California real estate transaction. In a foreign corporation sale, those same documents all apply, with additional authorization and tax documentation layered on top. Getting all of that assembled before opening escrow is what separates a transaction that closes on time from one that stalls for weeks while parties scramble for missing documentation.
If you are a foreign corporation selling California property or representing one, visit our sell your property page for an overview of how we approach complex transactions. And if you want to talk through the specific documentation and timeline for your sale, reach out to our team directly and we will give you honest guidance on what to expect.
Conclusion
Selling California real estate owned by a foreign corporation involves layers of federal and state tax withholding, corporate documentation requirements, and potential California registration compliance issues that simply do not exist in a standard domestic sale. None of these are dealbreakers, but all of them require advance preparation. A foreign corporation that waits until escrow is open to start gathering documents, applying for an EIN, or addressing California registration issues will almost certainly face delays. The parties who close these transactions smoothly are the ones who assemble everything they need before the purchase agreement is signed, not after. Engaging a US tax attorney or CPA experienced in cross-border real estate transactions early in the process is the single most important step a foreign corporate seller can take.
Frequently Asked Questions
What is FIRPTA and does it apply to foreign corporations selling California real estate?
FIRPTA is the Foreign Investment in Real Property Tax Act, which requires the buyer to withhold a portion of the sales price when purchasing US real estate from a foreign person or entity. Foreign corporations are subject to FIRPTA, and the standard withholding rate is 15 percent of the gross sales price for most transactions over $1,000,000. The withheld amount is remitted to the IRS as a prepayment of tax and is reconciled when the foreign corporation files a US tax return for the year of the sale.
Can a foreign corporation reduce the amount withheld under FIRPTA?
Yes. By filing Form 8288-B with the IRS before or at closing, a foreign corporation can apply for a withholding certificate that reduces the withholding to match the estimated actual tax liability rather than 15 percent of the gross price. This is particularly important when the property carries significant mortgage debt, because 15 percent of the gross sales price can far exceed the actual gain. The IRS typically takes around 90 days to process these applications, so they need to be filed well in advance of the expected closing date.
Is California withholding required in addition to FIRPTA?
Yes. California has its own real estate withholding requirement separate from FIRPTA. The state requires withholding of 3.33 percent of the gross sales price from any out-of-state or foreign seller, remitted to the Franchise Tax Board using Form 593. This withholding applies regardless of whether FIRPTA withholding is also required. Both amounts are prepayments of tax and are reconciled when the seller files the applicable federal and state returns for the year of sale.
Does a foreign corporation need to register in California before selling property there?
Owning and operating real property in California generally meets the threshold for doing business in the state, which triggers a registration obligation with the California Secretary of State and California franchise tax filing requirements. Many foreign corporations that held California property as passive investments were never properly registered. Unresolved registration and tax compliance issues can create FTB penalties that attach as liens to California assets, potentially surfacing as title clouds. A California tax attorney or CPA should assess any compliance exposure before the sale process begins.
Who needs to sign closing documents when the seller is a foreign corporation?
The authorized officer or officers of the corporation as identified in a corporate resolution must sign. The resolution must specifically authorize the sale of the California property and identify by name and title who has signing authority. If the authorized signatories are located outside the US, notarization may need to be completed before a US consulate or through an apostille process, depending on the country. The title company will review the authorization documents and confirm they are sufficient before accepting the signed deed.